Emulex plans acquisition in New Zealand

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Costa Mesa-based
Emulex aims to open up new markets with the $130 million acquisition of a New Zealand tech firm called
Endace, the companies announced this week.

Emulex, a provider of connectivity solutions for enterprise data centers including Ethernet and fibre chips, plans to use 70 percent of its cash balance to purchase Endace, a provider of network optimization solutions.

The data center market is rapidly growing in scale and speed to accommodate explosive growth in cloud applications. The continued evolution threatens to change the makeup of technologies used to run data centers, leaving tech firms like Emulex looking to invest in new and complementary technologies to stay competitive.

The news drew a lukewarm reaction from the stock market and some analysts.

“We still think the data center connectivity market faces uncertain growth prospects. Shifting sands are likely to require vendors to invest in new revenue growth opportunities,” J.P. Morgan analyst Mark Moskowitz said in a research note on the acquisition.

The companies announced the deal after the market closed Wednesday. Emulex (ELX), which trades on the New York Stock Exchange, closed at $7.02. But stock dropped nearly 9 percent, or 60 cents, Thursday. J.P. Morgan said the stock would underperform the market, and Goldman Sachs maintained a 12-month price target of $6 and recommended selling.

Endace provides both hardware and software for network performance management that allow enterprises to address issues in their data centers. Emulex officials hope the purchase will allow the company to offer additional services for managing data center performance. Emulex estimated the purchase would double the company's potential market to $3.2 billion by 2016.

Emulex intends to make its cash offer on Dec. 21 for 500 pence per share, which translates to approximately $130 million. Endace's independent directors approved the purchase pending an adviser's report and shareholders' acceptance of the offer. The transaction is expected to close early next year.

“In our view, the Endace purchase makes long-term strategic sense, but it also consumes 70 percent of Emulex's cash balance. While capital allocation has been a risk to our sell thesis, we have maintained that the more likely uses are potential acquisitions and a reserve for outstanding litigation matters,” Goldman Sachs analyst Bill Shope wrote in a research note.

Emulex faces ongoing patent litigation with Irvine-based
Broadcom. Broadcom sued Emulex in 2009 alleging patent infringement, and the two companies reached a partial settlement earlier this year; Emulex agreed to pay $58 million for a license fee to some of Broadcom's patents.

Emulex expects to make between $120 million and $124 million in revenue for the quarter ending Dec. 30.

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